Free Annual Reports
Ralcorp Bringing More To The Breakfast Table
The king of store-brand cereal, Ralcorp Holdings (NYSE:RAH), decided to go high society with its purchase of the Post Cereal business from Kraft Foods' (NYSE:KFT) for $2.8 billion.
When the deal announcement came in November of 2007, several analysts were wary of Ralcorp's ability to run both branded and private label products simultaneously. Doubters included Deutsche Bank and Morningstar. After all, the two products sell to entirely different demographics. Sure, cereal is cereal and they're on the shelf next to each other, but the consumers grabbing the boxes aren't the same people. Could this be another example of a company wanting to get big for the sake of getting big? I don't think so.
Began as a Spin-Off
In 1994, Ralston Purina (the pet food company) spun off its cereal division and several other businesses including some ski resorts into Ralcorp. It subsequently sold its ski assets in 1996 to Vail Resorts (NYSE:MTN) for $130 million, which became a 25% ownership stake. Today, that is down to 19%. While not a core business, it did provide $8.9 million in earnings in 2007, 25% of the bottom line. Since 1996, it has bought 19 companies that make store brand products. It currently operates five business units:
Post Acquisition
Ralcorp's core business is selling high quality store brands that compare to the national ones. Store brands can save consumers as much as 25% on their food bills, which in today's economy is especially helpful. However, consumers don't always want to penny pinch. Sometimes they want to live a little and when Ralcorp's salespeople were meeting with grocery buyers, the cupboard was bare when it came to branded products, until now.
On August 4, it completed the deal to buy Post Cereals from Kraft Foods. Post is the third largest branded cereal manufacturer behind Kellogg's (NYSE:K) and General Mills (NYSE:GIS). Post had sales of approximately $1.1 billion in 2006. On a pro forma basis, company revenue for fiscal 2007 to September 30 would have been $3.33 billion with net earnings of $99 million and earnings per share of $1.72. The new Ralcorp has 9,000 employees. More acquisitions are on the horizon according to David Skarie, co-chief executive officer and the one in charge of Post once the transaction is done.
Business Is Good
Revenue in all five divisions was higher in the third quarter. Total sales were up 13% or $75.1 million to $658.6 million thanks to higher prices and increased volumes. Ralcorp's revenue has grown from $1.3 billion in 2003 to $2.2 billion four years later in 2007. Operating income, from $87 million in 2003 to $161.4 million in 2007; cash provided by operating activities doubling in four years from $101 million in 2003 to $214 million in 2007. Those are all very steady in my opinion. (Learn more in Advanced Financial Statement Analysis.)
On August 12, Ralcorp said it sees a higher profit in fiscal 2008. Earnings per share will grow 5-10% higher than last year. Despite fast rising commodity prices, it's been able to keep up with price increases. Wachovia Securities rates it 'outperform' suggesting the cereal division was very successful in doing so. Two other analysts upgraded Ralcorp in July, Lehman Brothers to 'overweight' from 'equal-weight' and Longbow to 'buy' from 'neutral'.
Bottom Line
The new Ralcorp will do a lot of business with Wal-Mart (NYSE:WMT). Approximately 15% of its sales in 2007 were from the retail giant and Post's were even higher at 21%. Combined, it will sell 17% of its product to Wal-Mart. You can bet management is looking to up that number. On a valuation basis, Ralcorp looks cheap to me. Its two biggest competitors (Kellogg's and General Mills) both have stocks trading at 1.6 time's sales, while Ralcorp's stock trades at a price to sales ratio of just 0.6 . Branded products do have margins that are higher than store brands, but we're not talking profits here, we're talking sales. As Post's revenue begins to show up on Ralcorp's financial statements, we should see the bottom line fattening, and with it an increase in its stock price.
When the deal announcement came in November of 2007, several analysts were wary of Ralcorp's ability to run both branded and private label products simultaneously. Doubters included Deutsche Bank and Morningstar. After all, the two products sell to entirely different demographics. Sure, cereal is cereal and they're on the shelf next to each other, but the consumers grabbing the boxes aren't the same people. Could this be another example of a company wanting to get big for the sake of getting big? I don't think so.
Began as a Spin-Off
In 1994, Ralston Purina (the pet food company) spun off its cereal division and several other businesses including some ski resorts into Ralcorp. It subsequently sold its ski assets in 1996 to Vail Resorts (NYSE:MTN) for $130 million, which became a 25% ownership stake. Today, that is down to 19%. While not a core business, it did provide $8.9 million in earnings in 2007, 25% of the bottom line. Since 1996, it has bought 19 companies that make store brand products. It currently operates five business units:
- Ralston Foods (Cereals)
- Bremner Foods (Cookies and Crackers)
- Nutcracker/Flavor House (Snack Nuts)
- Ralcorp Frozen Bakery Products (Pankcakes, Waffles)
- Carriage House (Syrups & Jellies).
Ralcorp's core business is selling high quality store brands that compare to the national ones. Store brands can save consumers as much as 25% on their food bills, which in today's economy is especially helpful. However, consumers don't always want to penny pinch. Sometimes they want to live a little and when Ralcorp's salespeople were meeting with grocery buyers, the cupboard was bare when it came to branded products, until now.
On August 4, it completed the deal to buy Post Cereals from Kraft Foods. Post is the third largest branded cereal manufacturer behind Kellogg's (NYSE:K) and General Mills (NYSE:GIS). Post had sales of approximately $1.1 billion in 2006. On a pro forma basis, company revenue for fiscal 2007 to September 30 would have been $3.33 billion with net earnings of $99 million and earnings per share of $1.72. The new Ralcorp has 9,000 employees. More acquisitions are on the horizon according to David Skarie, co-chief executive officer and the one in charge of Post once the transaction is done.
Business Is Good
Revenue in all five divisions was higher in the third quarter. Total sales were up 13% or $75.1 million to $658.6 million thanks to higher prices and increased volumes. Ralcorp's revenue has grown from $1.3 billion in 2003 to $2.2 billion four years later in 2007. Operating income, from $87 million in 2003 to $161.4 million in 2007; cash provided by operating activities doubling in four years from $101 million in 2003 to $214 million in 2007. Those are all very steady in my opinion. (Learn more in Advanced Financial Statement Analysis.)
On August 12, Ralcorp said it sees a higher profit in fiscal 2008. Earnings per share will grow 5-10% higher than last year. Despite fast rising commodity prices, it's been able to keep up with price increases. Wachovia Securities rates it 'outperform' suggesting the cereal division was very successful in doing so. Two other analysts upgraded Ralcorp in July, Lehman Brothers to 'overweight' from 'equal-weight' and Longbow to 'buy' from 'neutral'.
Bottom Line
The new Ralcorp will do a lot of business with Wal-Mart (NYSE:WMT). Approximately 15% of its sales in 2007 were from the retail giant and Post's were even higher at 21%. Combined, it will sell 17% of its product to Wal-Mart. You can bet management is looking to up that number. On a valuation basis, Ralcorp looks cheap to me. Its two biggest competitors (Kellogg's and General Mills) both have stocks trading at 1.6 time's sales, while Ralcorp's stock trades at a price to sales ratio of just 0.6 . Branded products do have margins that are higher than store brands, but we're not talking profits here, we're talking sales. As Post's revenue begins to show up on Ralcorp's financial statements, we should see the bottom line fattening, and with it an increase in its stock price.
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
Free Annual Reports
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=ebb9154db8ff2979e8cb43a152bc6549
